Debt Sustainability Analysis for Euro Area Sovereigns: A Methodological Framework

44 Pages Posted: 11 Apr 2017

See all articles by Othman Bouabdallah

Othman Bouabdallah

Banque de France

Cristina D. Checherita-Westphal

European Central Bank (ECB)

Thomas Warmedinger

European Central Bank (ECB)

Roberta De Stefani

European Central Bank (ECB)

Francesco Drudi

European Central Bank (ECB)

Ralph Setzer

European Central Bank (ECB)

Andreas Westphal

European Central Bank (ECB)

Date Written: April 10, 2017

Abstract

The euro area sovereign debt crisis has highlighted the importance of reducing public debt levels and building up sufficient fiscal buffers during normal and good times. It has also reaffirmed the need for a thorough debt sustainability analysis (DSA) to act as a warning system for national policies. This paper introduces a comprehensive DSA framework for euro area sovereigns that could be used for analysis of fiscal risks and vulnerabilities.

Specifically, this framework consists of three main building blocks:

(i) a deterministic DSA, which embeds debt simulations under a benchmark and various narrative shock scenarios;

(ii) a stochastic DSA, providing for a probabilistic approach to debt sustainability; and

(iii) other relevant indicators capturing liquidity and solvency risks.

The information embedded in the three main DSA blocks can be summarised in a heat map, which can provide guidance on the overall assessment of risks to debt sustainability. This method reflects the need to have a broad-based assessment, cross-checking information and perspectives from various sources with a view to deriving a robust debt sustainability assessment.

Keywords: sovereign debt sustainability analysis, fiscal policy, public debt, euro area, fiscal risks

JEL Classification: E62, H62, H63, H68

Suggested Citation

Bouabdallah, Othman and Checherita-Westphal, Cristina D. and Warmedinger, Thomas and De Stefani, Roberta and Drudi, Francesco and Setzer, Ralph and Westphal, Andreas, Debt Sustainability Analysis for Euro Area Sovereigns: A Methodological Framework (April 10, 2017). ECB Occasional Paper No. 185. Available at SSRN: https://ssrn.com/abstract=2950979

Othman Bouabdallah (Contact Author)

Banque de France ( email )

Paris
France

Cristina D. Checherita-Westphal

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Thomas Warmedinger

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Roberta De Stefani

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Francesco Drudi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Ralph Setzer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andreas Westphal

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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